The Law of Corporations and Other Business Organizations

Chapter Review Answers

1. What are some of the advantages and
disadvantages of taking a privately held
corporation public?

Advantages of taking a privately held
corporation public include the increased
immediate and future availability
of capital through the sale of
stock to the public. Publicly held corporations
may also have added incentives
to offer qualified personnel, including
stock options, bonuses, and
other incentives. In addition, the publicly
held corporation has the advantage
of gaining national exposure
for itself and its products and/or
services.

Disadvantages of going public include
the fact that current shareholders of
the corporation will experience a loss
of control, especially in matters requiring
shareholder approval. The cost of
going public can also be prohibitive,
and the federal and state reporting
regulations can impose a significant
burden on a corporation, both financially
and on the time of the corporation’s
management.

2. What are the two general requirements of
§ 5 of the Securities Act of 1933 with regard
to securities that are offered or sold
through any means of interstate commerce?

a. Prior to the issuance of any securities
sold to the public, the issuer
must file a registration statement
with the SEC.

b. A prospectus meeting the requirements
of Section 5 of the Securities
Act must be furnished to the purchaser
of securities.

3. What is the due diligence defense?
It is a defense available to individuals
who use due diligence to ascertain the
truth of the matters for which they are
responsible in the registration statement
under the Securities Act of 1933.

To whom is the due diligence defense
available?

It is available to individuals, other than
the issuer, who sign the registration
statement.

4. What is the purpose of Form 8-K?
It is to notify the SEC and the public
when certain information contained in
the registration statement of the corporation
changes.

5. What are short-swing profits?
They are profits made by an insider
due to the purchase and sale of securities
within a six-month period.

6. What is the definition and the origin of
the term “blue sky laws”?
The term refers to state statutes regulating
securities. It was derived from
an early U.S. Supreme Court case in
which the court found that the legislative
purpose of the acts was aimed at
“speculative schemes which have no
more basis than so many feet of blue
sky.”

7. As a 20 percent shareholder in a publicly
owned corporation, Jane has decided to
sell her shares. What special requirements
must she comply with because she
owns such a large stake in the company?
Because Jane holds more than 10 percent
of the stock in the publicly owned
corporation, she is subject to § 16 of
the Exchange Act, which provides that
any profits realized from the purchase
and sale (or sale and purchase) of the
equity securities of a corporation by
insiders and/or principal shareholders
in any period of less than six months
normally shall inure to and be recoverable
by the issuer. If Jane has held
her stock in the corporation for more
than six months she can sell it, but she
will be subject to reporting rules that
will require that a statement setting
forth the beneficial ownership of the
stock be filed with the SEC and the
stock exchange on which the shares are
traded.

8. What is the purpose of the Sarbanes-
Oxley Act, and what prompted its passage?
The Sarbanes-Oxley Act was passed to
subject public corporations to tighter
controls concerning their accounting
and auditing procedures, corporate
governance, and reporting. The law
was passed in response to corporate
scandals that occurred in the years
2000 and 2001.

9. What are the purposes of the proxy and
the proxy statement?
The proxy is used by shareholders to
register their votes at shareholder
meetings without actually attending.
Proxy statements contain the information
shareholders need to make an
informed decision regarding the use of
the proxy.

10. When is the Form 10-K filed?
The 10-K must be filed electronically
with the SEC via EDGAR within 90
days after the end of the corporation’s
fiscal year. Certain corporations are
considered accelerated filers and must
file within 60 days after the close of the
company’s fiscal year.